To Retain or not to Retain That is

To Retain or not to Retain – That is the Question Strategic Planning To Retain or not. Workshop to Retain – That is the Question State Risk and Insurance Presented to: STRIMA Presented to: Management Association September 16, 2009 Presented by: Steven P. Kahn, Presented by: CPCU, ARM | Managing Director ARM Tech / Aon CPCU, Global ARM Risk Consulting Steven P. Kahn, | Managing Director Phone: 949 -470 -4341 Fax: 847 -953 -1672 ARM Tech / Aon Global Risk Consulting Phone: Fax: 847 -953 -1672 email: 949 -470 -4341 steven_kahn@armtech. com email: steven_kahn@armtech. com

Risk Financing Objectives ÊLowest long term cost of risk ÊCost stable within selected parameters 1

Cost of Risk ÊRetained losses ÊRisk transfer costs ÊProgram operation expenses Balance these costs to achieve desired outcome 2

Estimate Total Retained Losses Projected Ultimate Losses (000) Year Workers Compensation Property Liability Estimated Misc. Total 2000 $ 5, 000 $ 750 $15, 000 $150 $20, 900 2001 8, 000 500 8, 000 25 16, 525 2002 7, 000 150 10, 000 350 17, 500 2003 10, 000 1, 000 7, 500 175 19, 175 2004 8, 000 2, 000 9, 000 300 19, 300 2005 13, 500 1, 250 12, 000 26, 950 2006 7, 500 1, 000 8, 500 400 17, 400 2007 8, 500 4, 000 11, 000 50 23, 550 2008 9, 000 900 10, 000 150 20, 050 3

Determine Large Losses Number of Claims Exceeding $250, 000 Liability Workers Compensation $250, 000 – $500, 000 43 61 0 104 500, 001 – 750, 000 11 7 0 18 750, 001 – 1, 000 3 4 0 7 1, 000, 001 – 2, 500, 000 15 2 2 19 2, 500, 001+ 1 0 0 1 Range ($) 4 Property Total

Observations on Expected Losses Ê$20 to $23 million per year total ÊIndividual claims exceeding $2. 5 million are rare 5

What is Risk Working definition: ÊDeviation of actual results from expected results ÊWe are concerned with your ability to retain the unexpected 6

Risk Retention Ê How much can the state afford to retain and still meet major financial objectives? 7

Source of Funds ÊRisk management internal service fund ÊGeneral fund ending balance ÊSpecial or enterprise funds ÊSale of bonds ÊGovernors reserve ÊCatastrophe reserve ÊTax increase (not likely) 8

Payment of Unexpected Losses ÊIn the aggregate ÊPer event 9

Loss Retention Capacity ÊSum of – Losses state can expect to pay – Unexpected losses state can afford to pay and still meet major financial objectives ÊDetermine amount per event and aggregate 10

Schedule of Current Insurance Line of Coverage Retention Limit Annual Premium $0 Liability 10, 000 $50, 000 – Hull 2, 200, 000 125, 000 250, 000 500, 000 3, 750, 000 1, 000 25, 000 1, 250, 000 Blanket Crime Insurance 50, 000 3, 000 225, 000 Capital Art Collection 25, 000 1, 000 75, 000 State Park Historical Cabins 5, 000 750, 000 45, 000 0 1, 000 62, 000 Aircraft Blanket Property Excess Liability Auto Liability – Van Pool 11

Other Considerations ÊAmount state can afford to retain vs amount it makes sense to retain ÊCredit for alternative retentions ÊNeed for a particular service ÊContractual requirements ÊLegislative mandates ÊCan’t insure some losses ÊMulti-year retentions ÊBuy in from senior management 12